Investigating the Determinants of Nonperforming Loans in the Romanian Banking System: An Empirical Study with Reference to the Greek Crisis

Abstract

This paper aims to investigate the determinants of nonperforming loans in the Romanian banking sector by means of time series modelling. It is motivated by the hypothesis that macroeconomic‐cyclical indicators, monetary aggregates, interest rates, financial markets, and bank‐specific variables influence the nonperforming loans in the Romanian banking system. Using monthly series that span from December 2001 to November 2010, we cover both the booming period and the recent financial crisis. Given the significant presence of the Greek banks in Romania, the novelty of the paper lies in the introduction of variables that proxy the Greek crisis. Thus, we examine the existence of a potential transmission channel to the Romanian banking system by investigating the impact of the Greek crisis to the Romanian nonperforming loans. Our findings indicate that macroeconomic variables, specifically the construction and investment expenditure, the inflation and the unemployment rate, and the country′s external debt to GDP and M2 jointly with Greek crisis‐specific variables influence the credit risk of the Romanian banking system. The results have several implications for policymakers, regulators, and managers as the most recent published stress tests on the Romanian banking system are based on end 2008 data.